Key Takeaways
- • Buffered ETFs, also called defined outcome ETFs, are drawing retirees who want equity growth with downside protection; the category has ballooned to more than $30 billion in assets with billions in new inflows each year, according to a Morningstar report from April cited by CNBC.
- • The buffered ETF category has returned about 11% per year over five years, per the Morningstar report cited by CNBC.
- • Buffered ETFs typically charge 0.75% to 0.85% in annual fees, versus 0.03% for a plain equity index ETF such as Vanguard's VOO or SPDR's SPY.
- • The largest buffered equity ETFs include FT Vest Laddered Buffer ETF (BUFR) at $7.9 billion and Innovator Defined Wealth Shield ETF (BALT) at $1.9 billion, per ETFAction.com.
- • Concentration risk is central to the shift: roughly a third of the S&P 500 sits in a handful of big tech stocks, and Harvard economist Jason Furman estimated chip sales represented about 92% of U.S. GDP growth in the first half of the year.
Summary
Retirees and near-retirees face a constraint: they need equity growth to outpace inflation and rising health care costs, yet a severe market drop could leave them in a prolonged losing period without time to recover. Many financial firms still advise recent retirees to hold more than half their portfolios in stocks and reduce that allocation with age. Concentration in the U.S. equity market has raised the stakes, with a handful of large technology stocks accounting for roughly a third of the S&P 500.
CNBC reports that research from Harvard economist Jason Furman, a former Obama White House adviser, found chip sales represented roughly 92% of GDP growth in the first half of the year, and that the U.S. economy would have grown 0.1% without them. Federal Reserve Chair Jerome Powell said at the latest FOMC meeting that AI is a major source of growth, unlike the dotcom bubble. Such growth could benefit the economy over the long term but may raise short-term risk if returns on AI investment do not materialize quickly.
Recent market gains have left many retirement investors with large portfolio profits and a desire to trim equity exposure while remaining invested. Buffered ETFs, also called defined outcome ETFs, use options to protect against a set level of losses while capturing part of the upside. According to CNBC, the category has grown rapidly since the pandemic. TrueShares ETFs CEO Mike Loukas told CNBC's "ETF Edge" that the category "has gone meteoric," and argued that wealth is shifting from accumulation to distribution, with investors needing growth alongside risk protection.
Cited Morningstar data from April show the buffered ETF category returned about 11% per year over five years. Loukas said retirees are increasingly targeting "performance that's good enough" rather than beating the S&P 500. The tradeoffs include lagging strong bull markets and higher costs. Buffered ETFs generally charge 0.75% to 0.85% annually, compared with 0.03% for plain index ETFs. Largest products include FT Vest Laddered Buffer ETF (BUFR, $7.9 billion, 0.95% net expense ratio), Innovator Defined Wealth Shield ETF (BALT, $1.9 billion, 0.69%), FT Vest Laddered Deep Buffer ETF (BUFD, $1.5 billion, 0.95%) and Innovator Equity Managed Floor ETF (SFLR, $1.2 billion, 0.89%), according to ETFAction.com. Loukas described the products as "essentially math-based" that "typically will deliver on what they're supposed to deliver on."
CNBC reports that research from Harvard economist Jason Furman, a former Obama White House adviser, found chip sales represented roughly 92% of GDP growth in the first half of the year, and that the U.S. economy would have grown 0.1% without them. Federal Reserve Chair Jerome Powell said at the latest FOMC meeting that AI is a major source of growth, unlike the dotcom bubble. Such growth could benefit the economy over the long term but may raise short-term risk if returns on AI investment do not materialize quickly.
Recent market gains have left many retirement investors with large portfolio profits and a desire to trim equity exposure while remaining invested. Buffered ETFs, also called defined outcome ETFs, use options to protect against a set level of losses while capturing part of the upside. According to CNBC, the category has grown rapidly since the pandemic. TrueShares ETFs CEO Mike Loukas told CNBC's "ETF Edge" that the category "has gone meteoric," and argued that wealth is shifting from accumulation to distribution, with investors needing growth alongside risk protection.
Cited Morningstar data from April show the buffered ETF category returned about 11% per year over five years. Loukas said retirees are increasingly targeting "performance that's good enough" rather than beating the S&P 500. The tradeoffs include lagging strong bull markets and higher costs. Buffered ETFs generally charge 0.75% to 0.85% annually, compared with 0.03% for plain index ETFs. Largest products include FT Vest Laddered Buffer ETF (BUFR, $7.9 billion, 0.95% net expense ratio), Innovator Defined Wealth Shield ETF (BALT, $1.9 billion, 0.69%), FT Vest Laddered Deep Buffer ETF (BUFD, $1.5 billion, 0.95%) and Innovator Equity Managed Floor ETF (SFLR, $1.2 billion, 0.89%), according to ETFAction.com. Loukas described the products as "essentially math-based" that "typically will deliver on what they're supposed to deliver on."
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